Fed Chair Ben Bernanke said in a speech to a symposium Tuesday that the public's perception of inflation is itself a factor in determining prices. He was interpreted to mean that a refusal by Americans to accept current price increases as normal should contribute toward lowering inflation in the future. Bernanke's comments were criticized as overly academic, since they addressed neither the practical boundaries of the Fed's so-called "comfort zone" on inflation nor the notion that the Fed adopt a specific inflation target. The Fed is also being criticized for focusing on the "core" inflation index, which excludes food and energy prices. Bernanke alluded to energy price swings in his speech, but implied that they do not yet pose a threat: "[T]he sharp increases in energy prices over the past few years have not led either to persistent inflation or to a recession, in contrast...to the U.S. experience of the 1970s." Inflation expectations, he said, are less affected than they used to be by such swings, but are still "imperfectly anchored." Not all economists fault the Fed for its chosen inflation gauge. "The Fed is pretty powerless to do something about the price of energy or the price of food," said Princeton economist Alan Blinder. "I don't want to charge the Fed with responsibility for something it can't do." In related news, House Financial Services Committee Chairman Barney Frank is bringing Harvard's Benjamin Friedman to testify in opposition to a federal inflation target.
Sources: Chairman Bernanke's speech, New York Times, MarketWatch, Wall Street Journal I, II
Commentary: FOMC Takes a Dovish Stance Despite Persistent Inflationary Risks • Core Inflation Remains a Low 0.1% • Where The 'Fed Model' Has Validity - And Where Not
Stocks/ETFs to watch: ETFs: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
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